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C. Shivkumar

Bangalore, Oct. 30 With the downturn in the equity market, insurance companies have shifted investments to certificates of deposits and short-term Treasury bills.

Industry sources said that the pull-out from equities was a short-term measure and stemmed from fears of depreciation in investments. They said the preference was more for CDs that offered coupons of close to 12 per cent. The shift to Treasury Bills (T-Bills) was largely for liquidity purposes and for meeting solvency.

Most of the private sector non-life insurance companies were already marking their investments to market. This was despite the fact that the insurance regulator was yet to accept the international solvency guidelines as prescribed by the International Association of Insurance Supervisors (IAIS). The IAIS guidelines prescribed valuing investments on the basis of market prices.

The pre-emptive move by the insurers, the sources said, was done to prevent any damage to their respective solvency ratios, in the event of the Insurance Regulatory and Development Authority (IRDA) migrating to the marked-to-market regime for valuation of investments. IRDA currently permits investments to be valued on the basis of book value.

Only public sector insurers currently value their investments at book value. This was because PSU insurers made their equity investments at low values. It is only now that the PSU insurers have chosen to unlock the value of their investments for improving respective solvencies.

In the event of a migration, the sources said, private sector insurers are likely to see a steep depreciation in their investments with a consequent effect on their respective solvency ratio. IRDA’s prescribed solvency ratio is currently 150 per cent. This implied that insurer’s capital and the value of assets would have to be at least 1.5 times more than the insured liabilities.

The preference for short-term T-bills and Government securities was largely due to the softening yields since September this year. At Wednesday’s auction, for instance, the cut-off yield on the 91-day T-bill was 7.26 per cent or down from a peak of 9.32 per cent on July 30 this year. The weighted yield drop stemmed partly from the Rs 1,400 crore of non-competitive bids at the auction. Insurers are treated as non-competitive bidders at the T-bill auctions.

The shift to Government securities also stemmed from anticipation that the Reserve Bank of India was likely to carry out more liquidity support measures, either through a reduction in the repurchase rates or through further reductions in the Cash Reserve Ratio.

Currently, the repo rate stands at 8 per cent after the steep 100 basis point cut effected two weeks ago. Similarly, since the beginning of this month, CRR was brought down to 6.5 per cent. As a result, the sources said, insurers’ investments in Government securities and T-bills are likely to appreciate, neutralising the impact of the downturn in equity investments.

Besides, the shuffle of investments was also triggered by fears that their respective parents would not be in position to bring in more equity capital even if the Government diluted the foreign stake holding to 49 per cent from the current 26 per cent.

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